fscom News and Events

Countdown to No-Deal Brexit (or not)

[fa icon="calendar"] 6 Sep 2019, 17:19:15 / by James Borley

James Borley

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At the beginning of February this year, eight weeks prior to the original 29th March Brexit date, we published a blog entitled “No-deal Brexit – is there a regulatory backstop?” In this blog, we attempted to summarise what firms could expect in the event we crashed out having failed to agree transitional provisions with the EU27. Eight months, four failed votes and one prime minister later we find ourselves in a painfully similar situation eight weeks before the new Brexit date of 31st October. In this blog we will revisit some the issues addressed in our initial blog, and how these may have changed since the time of writing. I write this though at a time of the utmost uncertainty, with legislation proposed to remove the possibility of No Deal, another Prime Minister under threat, and the possibility of a General Election that might yet result in a new referendum. Nevertheless, let’s deal with the here and now…

Regulatory position

Over the course of the past three years under PM Theresa May, Parliament formalised the transition of existing EU law into the domestic statute books. This body of law referred to as ‘Retained Direct EU Legislation” will become the leading source of much UK legislation on the day following either a managed or unmanaged exit. Based on this, regulations stemming from EU directives such as PSD2 e.g. safeguarding, and capital adequacy requirements, will remain entirely operational and therefore firms will not be subject to higher or lower standards immediately following Brexit.


While procedural regulations will remain largely the same, how firm’s treat many of their clients may be subject to the UK’s changed relationship with the EU, from Member State to third country. The EU has stated that UK firms “will have to comply, as of the withdrawal date, with the rules of the Member State applicable to branches having their head office in a third country including the requirement to be authorised by the relevant competent authority of the host Member State” . This means that all regulatory permissions stemming from the use of a passport will no longer be valid across Europe. While some countries have made transitional arrangements for this event, which we shall discuss later, many have not and therefore firms should take due care in considering whether they want to continue servicing customers on a risk-based approach to reverse solicitation, or to undertake the authorisation process in an alternative jurisdiction. While many firms have opted for the latter, this is an expensive process and, given the FCA and other regulators’ backlog of applications at the moment, submitting today will not stop a tumble over the 31st October cliff edge. [At the time of writing, that 31st October deadline looks as if it may be sought to be extended yet again, but the same principles will apply, unless legislation removes the possibility of No Deal altogether].


However, the Single Euro Payments Area (SEPA) standards will continue to be followed by PSPs within the UK, paving the way to continued access to Europe’s most utilised payment rails, a major win for PSPs who use these rails to service customers across the continent. As a non-European Economic Area SEPA country, the UK will join the likes of Andorra, Guernsey, Isle of Man, Jersey, Monaco and Switzerland in our access to the scheme. That said, the question remains whether UK firms can legally service these customers on a reverse solicitation basis in the absence of a trade-deal however it is a major advantage that should they choose to do so, the SEPA rails will still be available to them.

Reverse Solicitation

Following a No Deal exit, firms can no longer actively market or onboard clients based in an EEA Member State. Furthermore, firms cannot rely on affiliates and agents located in other Member States to do so on their behalf.

What is less clear is the status of a transactions initiated via reverse solicitation. Reverse solicitation refers to transactions submitted to a UK-based firm, exclusively at the discretion of a European client, and is articulated in MiFID II rather than PSD2 (but hey, surely the principle should apply consistently across single market directives, if not explicitly stated?). But what should the firm do if the client approaches them via a remote channel. Firstly, absent any specific guidance from the Commission or the EBA, how these EU directives are interpreted and applied varies from state to state; some Member States look to where the transaction is performed (the ‘characteristic test’) while others look at where it was solicited, highlighting the lack of clarity for firms in the event of a No Deal.

Firm preparations

At this stage, most firms are well into their Brexit preparations, with applications for new licences submitted in a wide variety of jurisdictions. Therefore, what else can firms do now to prepare?

With the exit from the bloc imminent, some bodies around Europe have confirmed they will make allowances, often, in view of protecting their own markets from disruption. Italian ministers confirmed in March that British-based firms providing services in Italy would be permitted to continue, based on the extension of Branch laws, for an 18-month grace period. Firms that wish to make use of this provision should make a notification to the Bank of Italy no later than the 28th October.

The German federal government has also issued a decree designed to preserve market access for firms offering financial services such as banking and payments for a transitional period limited to 21 months. Under the German approach, services can be continued insofar as they are ‘closely connected’ with existing contracts. While the definition of ‘closely connected’ remains vague, the legislation is designed to allow firms time to complete the authorisation process in Germany or conduct an orderly wind down of services causing minimal disruption. Therefore, firms providing services in Germany should consider whether they want to avail of this and submit an application.

Spain has followed Germany’s example in permitting the fulfilment of existing contracts but, however, has stated that any UK firm seeking to amend existing or enter into new contracts must apply for authorisation as a third country firm. Spain has also placed a much shorter time period of nine months on the exemption, placing further pressure on firms to solidify their post-Brexit plans.

The Netherlands has been more coy on the status of banking and payment services, but have issued exemptions for firms regulated under MiFID II, designed to allow UK-based investment firms to provide services and enter into own account trading without a local Dutch licence. This temporary measure will apply until 1 January 2021 and will only become active upon formal announcement by the Minister of Finance. Firms must notify the regulator via a conditional registration to the tune of €4,400. Furthermore, firms will be required to submit evidence of the fact they are indeed regulated by the competent authorities.

Final comments

So, after months of turmoil and uncertainty very little seems to have changed. Indeed, given the latest and future political machinations, we are no nearer knowing quite when (or if) we will be leaving the EU. But, as I said in my earlier blogs, better to hope for the best but plan for the worst. If you need help in that planning, our fscom team is ready to assist.

Get in touch with fscom!

Topics: PSD2, Payment services, BREXIT, authorisation, passporting, payments, Payments sector

James Borley

Written by James Borley

Director at fscom